No compelling economic explanation for cryptoasset pricing, volatility: CFA Institute

Don’t invest in cryptoassets before analyzing their value and understanding the basis for the expected rate of return, a global association of investment professionals says.

“Volatility and [cryptoasset] prices in general appear to be poorly understood, with no compelling explanations of the economic causes,” New York City–based CFA Institute said in a new report that highlights the crypto market’s merits and risks; discusses concerns related to valuation, fiduciary duty and custody of assets; and offers recommendations to investors and policy-makers.

Before plunging into crypto investing, advisors should “take a careful, studied approach” and be prepared to give clients “an analysis of intrinsic value, volatility, correlation effects, momentum, or technical features” of a proposed investment within the overall portfolio, the report said.

“Hype and popularity do not in and of themselves constitute a sound investment basis,” it said. “Fiduciaries should be in a position to explain the economic rationale for a proposed investment, the basis for return expectations, and an evaluation of risk factors.”

The crypto sector needs minimum standards of investor protection and prudential oversight, Ontario Securities Commission CEO Grant Vingoe said in a speech last year, within weeks of the federal Office of the Superintendent of Financial Institutions’ release of an interim approach to the regulatory capital and liquidity treatment of cryptoasset exposures.

The CFA report noted that in the U.S., the prudent investor rule, based on principles of trust law, does not prohibit any particular asset class or type of investment class but instead requires fiduciaries to have an overall investment strategy with risk and return objectives that are suited to the trust, and to diversify the investments of the trust.

The report also referenced the demise of crypto platform FTX last November.

“For investors and regulators alike, FTX’s failure reinforces the central importance of custody and protection of investor assets,” it said. “Investors in cryptoassets and participants on crypto platforms must be particularly diligent in understanding how their deposits and assets will be protected and segregated.”

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